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Disruption in Real Estate: What Is It?
Disruption in Real Estate: What Is It?
The big buzz word in real estate these days is “disruption.” This term refers to the quiet revolution that is occurring in the real estate world. Back in the “good ole days,” real estate brokerages were a big profit business, and when a buyer wanted to look at a home, they had to go by the real estate office and look through what I like to call “listing mug shots,” a book that was published weekly with all the currently listed properties.
As computer technology invaded the real estate industry, the Multiple Listing Service was built—an electronic database of listed properties that real estate companies shared with one another. As the technology continued to develop, this database of information, everything about a listed property from year built to bedroom count, was shared on the internet. Even if your brokerage didn’t actually list the property, all brokerages who were a part of the MLS were allowed to feature ALL the listings in the MLS (all of the information contained in the MLS, including sold information) on their web site. Brokerages offered to pay agents who weren’t even with their brokerage a “co-brokerage” fee if they would bring a buyer, and buyer’s agency was born.
This is where it starts to get complicated. Brokerages and real estate agents are about sales, not about technology. Most brokerages and sales agents didn’t fully understand how the MLS worked, they just knew how to get the data they needed and sell homes. As the data from the MLS’s began to be shared with more and more internet sites—increasingly sites that were NOT owned by brokerages, buyers and sellers began to recognize the power of having access to this data.
Again, most agents still know just enough about the technology platform that drives their business to get what they need to serve their clients. Now, massive 3rd party companies like Zillow and Realtor.com supply MLS information from MLS associations around the US free to consumers. Brokerages, which used to be the cash cows of real estate, are a shadow of their former selves, and these 3rd party companies are making Billions of dollars by collecting MLS information from the MLS systems (usually FOR FREE, by the way) and using this information to create market interest, then SELLING the contact information from these interested parties to the very real estate agents and brokerages who created the MLS information in the first place. This has left a bad taste in the mouths of many brokerages and real estate agencies. This, in a nut shell, is market disruption.
The term “disruption” actually comes from a February 1995 article published by Joseph L. Bower and Clayton M. Christensen entitled “Disruptive Technologies: Catching the Wave.” The thrust of the article is that companies tend to favor sustaining technologies (technologies that give customers more of what they already value or make what is already available better) over disruptive technologies (technologies that introduce a very different kind of service or attribute, one that is not particularly important to the historic customer base). Companies are almost biased against disruptive technologies because these services or attributes are only valued in new, small, less profitable markets.
One of Christensen’s examples is Sony’s early transistor radio. It sacrificed the sound fidelity of the popular large, home radios, but created an entirely new market: radios that were smaller, light weight, and highly portable. Once this technology captures the market, it quickly overtakes sustaining technologies and then develops itself at a much faster pace than the sustaining technology. Those companies that bet on the sustaining technology—which makes perfect sense from a management and profit perspective—are quickly overrun and by the time they recognize this disruptive technology as legitimate, it is too late and the new-comer who has bet on the disruptive technology has taken over the market.
Applying this to real estate, brokerages and real estate agents, who exclusively own all the listing information on their listed properties, did not recognize the potential value of this information, and essentially gave it away for free because the sustaining technology argued that the clients, not the information, was most important. Companies like Zillow and Trulia recognized the value of this information, and created a disruptive technology that allowed consumers to search this information for free. By the time brokerages and agents saw the potential, it was too late.
Now, a second major period of disruption in the real estate market is occurring on the brokerage side. Beleaguered by shrinking profits and increasing liability, traditional brokerages are being consolidated left and right (see How Mergers, Money, and Machines are Reshaping Real Estate). One of the emerging trends in this era of disruption is the virtual brokerage. These brokerages are leveraging technology and shedding some of the most expensive pieces of owning a brokerage, two of which are the traditional brick and mortar office and the office manager. Typically, “office manager” may be the Broker-In-Charge, the owner, the CEO, the Operating Principle, the initial investors, etc. By removing just these two things, the virtual brokerage can cut their operating budget by 1/3 or even in some cases ½.
In my next blog, I’ll share more about what the virtual brokerage brings to the market and how it benefits both real estate agents and consumers.
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